The 401k retirement savings account offered by employers has become ubiquitous over the last 30 years. But some retirement planning experts predict that 401ks will be overtaken by a new form of retirement savings in the future. The reason is simple: the accounts don’t help lower income employees who lack the ability to save for retirement, and they put each saver at individual risk, without the ability to pool risks with a lot of other savers.
Those were precisely the advantages that used to make traditional pension plans a hit for employees. They didn’t have to sacrifice current earnings to contribute to their pensions, and the investment risk was borne by everyone in the pension so that no one individual was subject to a sudden market decline. Instead, each 401k owner is on his or her own when it comes to investment risk, and each employee must save up enough money to fund their own retirement. It is a daunting task, retirement experts say.
Some have advocated allowing the states to open up their public pension plans to small private employers, allowing employees to buy into the state pension plan by transferring in their 401k assets. Others have advocated a new mechanism within 401k plans that would force employees to allocate their money into an annuity-like account that would guarantee a lifetime income off of their assets. Some proposals would allow employees to still share in some guaranteed market growth as well as change their minds and withdraw assets at any time.
As these options are debated, experts recommend that employees over 50 not make any rushed moves. Now is not a good time to lock up 401k money in a fixed rate annuity, partly because rates are so low and partly because improved offerings may be coming in the future. Also, don’t expect that you will be stuck with your company’s 401k offerings. At retirement you will be allowed to roll your account over to an Individual Retirement Account and then take advantage of competitive offerings from all of the major investment providers. Finally, keep socking money away so that you can buy a bigger benefit someday.